Arden Dale for the Wall St. Journal writes: Many wealthy people routinely seek tax extensions before the April 15 deadline arrives, but that doesn't mean their financial advisers and accountants get a vacation. The often complex business dealings and investments of well-heeled investors can take longer to sort out. With extensions in hand, their returns to the Internal Revenue Service are sometimes not filed until summer or even fall.
Their advisers, meanwhile, have to keep an eye on that far horizon. And because delaying a return doesn't mean one should delay paying taxes, they must estimate now what the real tax bill will be later and make sure a payment is made. This can mean figuring out, say, whether a private equity investment is likely to report a $1 million loss or a $1 million gain later in the year.
Advisers may also need to figure out how to keep a client liquid enough to pay that estimated tax.
Some wealthy taxpayers know that filing extensions and estimated payments are par for the course. Others need a heads up.
"Our primary responsibility is to make sure people know they won't be filing right away," said Scott Barbee, a senior adviser in Wealth Advisory Services at Truepoint Inc., a fee-only firm in Cincinnati, Ohio, with about $1.2 billion under management.
Ninety percent of the clients in Alfred Peguero's practice regularly file for extensions on their tax return. Peguero is a partner in the San Francisco office of accounting firm PricewaterhouseCooper's Private Company Services group.
The group works with high-net-worth taxpayers on wealth management, and financial and tax planning. Managing the timing of extension requests and estimated payments is "like a Swiss clock," said Mr. Peguero.
The primary culprit for the delays is IRS Form K-1.
Trusts in an estate, or investments in hedge funds, private equity or partnerships are often slow to issue K-1s, which go to the IRS as part of a tax return. While some do arrive in investors' mailboxes as early as February, others may get there as late as September. Mr. Peguero has seen investors with as many as 100 K-1s.
Lisa Featherngill, managing director of planning at Abbot Downing, the family office practice of Wells Fargo, said she always mentions the risk of a tax filing hassle when talking about hedge funds and other complex investments with clients.
"I've seen resistance recently to enter those types of investments because of the fact that they get their K-1s so late," said Ms. Featherngill. Abbot Downing, based in Minneapolis, Minn., has about $32 billion in client assets.
A client of Ms. Featherngill who already owns hedge funds recently balked at adding more, she said, because of the tax headaches.
Mr. Barbee, of Truepoint, said his firm always notes that private equity investments it recommends to certain clients will mean having to get a tax extension.
Taxpayers use Form 4868 to ask for an extension electronically or on paper. Generally, the IRS can't extend the due date of a return for more than six months.
One client of Mr. Peguero underestimated income from a building before he got a final report on the investment. Ultimately, the man had around $300,000 more in income than expected, and owed around $20,000 more than he had paid in tax. He was able to avoid penalties by showing tax authorities emails to prove he made a good faith effort to report his income accurately.
0 comments:
Post a Comment